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In the UK, it is seen that incorporation is an easy process and all that is required for one or more person is to have a lawful purpose and to comply with the conditions of registration that are provided in the Companies Act 2006. The entire process takes less than a week for paper based applications and at times the entire process may take only a day, evidencing an ease and speed of incorporation.
Simplification of the process of registration of company has always been one of the concerns of the law and policy makers and this is seen since the process of incorporation was first simplified under the Limited Liability Act 1855 and the Joint Stock Companies Act 1866. While the ease and speed of incorporation do have their benefits for the company as well as the parties wishing to incorporate a company, there are also some disadvantages, as are discussed in this essay. Therefore, such an ease is capable of incurring both praise as well as some criticism.
This essay discusses the significance of incorporation for the purpose of setting a context for understanding the advantages as to why incorporation is desired to be simplified. The process of incorporation is discussed to understand the actual process involved in the registration of companies. Finally, the essay critically appreciates the advantages and disadvantages that are associated with the ease and speed of incorporation.
Incorporation leads to the personification of a company in law. The significance of this personification was very well explained by Lord Macnaughton in one of the most important cases in company law, Salomon v Salomon:
“The company is at law a different person altogether from the subscribers to the Memorandum [shareholders] and though it may be that after incorporation, the business is precisely the same as it was before, and the same persons are managers and the same hands receive the profits, the company is not in law the agent of the subscribers or a trustee for them. Nor are subscribers as members liable in any shape or form, except to the extent and in the manner provided by the Act”.
Incorporations creates a company as a legal person that has its own identity in the eyes of the law. This has many implications. The principle implication of incorporation is the creation of corporate structure of the company, which then leads to certain effects. First, once the company is incorporated, the principle of limited liability is applied to it, which means that the liability of the members of the company is limited. This ensures that the members of the company are safeguarded from owing co-extensive debts with the company as the company is liable for its debts and losses and the members are only liable in the limited sense. Second, the company has perpetual succession, which means that its continued existence does not depend upon the life of its members and the company has life of its own, which is perpetual. However, under certain circumstances, company can also be wound up. Third, the company as a legal person is the bearers of rights, such as the right to enter into contracts and the right to own property, both real and personal. This ensures that the members of the company do not claim the property of the company. This also ensures that the company is the only one responsible for its contractual duties and breach of contract liability does not fall on its members. Fourth, only the company can initiate any actions in its own name as the company is the only proper plaintiff in such actions. This ensures that only those actions that the company (through majoritarian rule) sanctions, will be initiated in courts of law.
As is clear, incorporation has several benefits both for the company as well as its members. Therefore, from the perspective of the company as well as the members, incorporation is beneficial.
The process of incorporation is provided under the Companies Act 2006 (CA 2006). The law itself was a result of important reforms that were undertaken in company law. It is worthwhile to consider this process for the purpose of seeing whether the process gives ease of formation of company.
The method of forming the company is provided under CA 2006, s.7, which provides that one or more persons can form the company for a lawful purpose, by subscribing to its Memorandum of Association and complying with the registration process as given in ss. 9 to 13. As such, a one-man company can also be formed under the CA 2006. Such companies are also recognised under the European Community Twelfth Directive on Company Law (89/667) as well as the Companies (Single Member Private Limited Companies) Regulations (1992). Therefore, the CA 2006 gives ease of formation of one-man public companies.
CA 2006, s.9 provides for the documents that are required for registration, which are to be submitted to the Registrar of Companies with the Memorandum of Association, and these are: the application for registration (specifying the proposed name and the nature of liability and company, public and private); the statement of capital; the statement of guarantee (if the company is limited by guarantee); the statement of proposed officers of the company; statement of intended address of the company; the statement of compliance verifying that the conditions of the CA 2006 are complied with; and the Articles of Association.
The actual registration depends on the satisfaction of the Registrar of Companies, who issues a certificate of registration on the obtaining of such satisfaction. The effects of the registration are that the company is incorporated with effect from the date of the issue of the certificate and the subscribers and future members are part of the body corporate. Such a body corporate has the capacity to exercise all such functions that an incorporated company can exercise generally.
The Registrar of Companies cannot refuse the registration of the company if the purpose for which it is being established is lawful and the documents are also in order. In R v Registrar of Companies ex parte Bowen,the Registrar was issued a writ of mandamus for refusing to register the company. On the other hand, if the objects of the company are unlawful, then the Registrar may refuse to register the company.
It is easy to incorporate companies in the UK as is evident from the discussion in the previous section. People are able to incorporate companies even on the same day itself, and so there is a possibility that the incorporators do not appreciate the legal responsibilities that are attached to such incorporation. Many times incorporators do not even approach solicitors to take advice before incorporating companies.
It is noteworthy that once given, the certificate of registration is a conclusive evidence of the company’s incorporation even if procured by fraud. Hence, if the certificate is given easily and speedily there may be a possibility that the Registrar may not be able to everything necessary for ensuring that the company is not being incorporated by fraud, etc. However, he would still be responsible for breach of duty to take care if some anomaly is found post incorporation. In one such case, the Registrar was made liable to indemnify the company for incorporating it when another company by the same name already existed.
Not only can people apply for registration of companies, they may also purchase ‘off the shelf companies’ from company formation agents. These company formation agents sell companies that have received the certificate of incorporation and are ready for immediate use. The problem is that in this process, what is seen is that there is an ease and speed of incorporation, which is criticised because it can obscure the legal realities that come with the formation of the company, and the parties involved may themselves not have the legal knowledge to understand their changed legal roles and position. The off the shelf companies evidence incorporation by people who have not been involved in the incorporation process themselves. Here incorporation process itself was carried out by people who had no intention to run the company.
Within the EU, there are other jurisdictions where such an ease of incorporation is not evident. In Germany, the formation process is quite strict and even involves the incorporators applying to the court after the completion of the documentation and it is the court that finally gives the entry into the commercial register after satisfying itself as to all the conditions being met. Compared to the UK, it takes considerably longer to get a company registered in Germany.
It is generally acknowledged that the UK has the most ease and speed of incorporation of all the members in the EU. This has led to some complications for other member states. Especially, the minimum capital requirements for the private companies has been criticised for leading to the establishment of companies easily in the UK. The ‘freedom of establishment’ cases that have been decided by the European Court of Justice are relevant in this respect. In Centros Ltd v Ehrvervs-og Selskabstyrelsen, the differences in ease of incorporation of private companies in the UK and the relative strictness with respect to capital requirements in Denmark were evidenced, when Denmark refused to allow the functioning of the UK incorporated company, as it did not have the minimum capital as per Danish law. However, the European Court of Justice held in favour of the company. The corporate mobility principle has been developed in the European jurisprudence to ensure that cross border incorporated companies are allowed to function freely within the EU. Ultimately, small companies seek to incorporate themselves in countries where there are suitable minimum capital requirements, as is seen in the UK, which allows them to easily be incorporated as companies.
Despite the obvious ease of formation of companies in the UK and the concerns that such an ease of formation may lead to lack of legal knowledge of the incorporators and may serve as a potential source of abuse by the members of the company, the Company Law Review Steering Group in 1999 did not find that there was any increased levels of abuse manifest in companies which could be attributed to the incorporation process.
Incorporation of companies in the UK is made fairly simple and easy under the CA 2006. This has its advantages, especially for the small companies and private companies. At the same time, ease of incorporation is important for the purpose of ensuring that incorporators do not face unnecessary hassles in registering a company. The problems that are associated with the ease of incorporation arise because the Registrar may not get sufficient time to check the applications, which may result in anomalies later on. Another problem is that the incorporators may rush through the process without understanding the legal position that is associated with the incorporation. Ease of incorporation also allows people to acquire incorporation of companies without intending to run them and then selling such off the shelf companies to others who are not involved in the incorporation process and are therefore not knowledgeable about the legal intricacies related to important documents such as Memorandum of Association and Articles of Association. These documents are registered at the time of incorporation and these are essential to understanding the scope of companies powers as well as duties and responsibilities in law.
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